Question 1

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%, then

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Question 2

If a central bank reduced inflation by 4 percentage points and this made output fall by 5 percent for one year and 3 percent for another year and the unemployment rate rise 2.5 percent above its natural rate for one year and 1.5 percent above its natural rate for another year, the sacrifice ratio was

Accepted Answer

The sacrifice ratio measures the percentage reduction in output for every 1 percentage point reduction in inflation. In this case, the central bank reduced inflation by 4 percentage points, so the sacrifice ratio can be calculated as:

[(5% output fall × 1 year) + (3% output fall × 1 year)] ÷ (4 percentage point reduction in inflation) = 2

Therefore, the answer is B.

Question 3

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?

Accepted Answer

The sacrifice ratio is the percentage of GDP that must be sacrificed to permanently reduce inflation by 1 percentage point. In this case, the Bank of Mokania reduced inflation from 15% to 5%, meaning a total reduction of 10 percentage points. The sacrifice ratio is calculated by dividing the percentage point reduction in inflation by the percentage increase in unemployment and the percentage decrease in output. In this case, the sacrifice ratio would be 10/(10 + 30) = 0.25. Therefore, initially people's inflation expectations had been higher than 5% and the sacrifice ratio was 3 (1/0.25 = 4).

Question 4

The long-run response to a decrease in the money supply growth rate is shown by shifting

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Question 5

The long-run response to an increase in the growth rate of the money supply is shown by shifting

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Question 6

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However, people were expecting inflation to fall to 7% and there was a favorable supply shock. In the short run which of the following made unemployment lower than otherwise?

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Question 7

If a central bank announced that it was going to decrease inflation by 5%, people revised their inflation expectations downward by 4%, and the central bank only lowered inflation by 1%, the short run Phillips curve would shift

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Question 8

Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run

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Question 9

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year, the sacrifice ratio is

Accepted Answer

The sacrifice ratio represents the cumulative percentage point loss of output for every percentage point reduction in inflation that the central bank achieves. In this case, the sacrifice ratio would be calculated as follows: 
Sacrifice ratio = (percentage point increase in unemployment + percentage point decrease in output) / percentage point decrease in inflation
Sacrifice ratio = (5 + (-3)) / 2 = 1
Therefore, the sacrifice ratio is 1, or for every 1 percentage point reduction in inflation, output falls by 3 percentage points and unemployment rises by 5 percentage points for one year. Choice B is the closest answer to 1.

Question 10

Which of the following is not correct?

Accepted Answer

Unemployment can be influenced by factors such as changes in technology, demographics, and economic shocks, in addition to government policy. Therefore, statement C is not correct.

Question 11

Other things the same, if the central bank decreases the rate at which it increases the money supply, then

Accepted Answer

When the central bank decreases the rate at which it increases the money supply, it reduces the availability of funds in the market, making it harder for businesses to borrow money for investments. As a result, unemployment rises as these businesses decrease their hiring. However, the reduced money supply also means that there is less money circulating in the economy, which can reduce prices and lower inflation in the short run.

Question 12

Most economists believe that a tradeoff between inflation and unemployment exists

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Question 13

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However the unemployment rate was on average higher for many years after. A newspaper editorial argues that the unemployment rate had moved to this higher natural rate because 1) by itself the decrease in inflation had permanently increased unemployment and 2) that at the same time the central bank was fighting inflation the government of Mokania had made a large increase in the minimum wage. Which of these arguments is consistent with the Phillip's curve model?

Accepted Answer

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Question 14

In response to the financial crisis of 2007-2008, policymakers used

Accepted Answer

Expansionary monetary policy involves increasing the money supply and decreasing interest rates, while expansionary fiscal policy involves increasing government spending and/or decreasing taxes. These policies were used in response to the financial crisis of 2007-2008 to stimulate economic growth and prevent a deeper recession.

Question 15

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes its intent to reduce the inflation rate to 5%. If it is successful in doing so but people had expected inflation to fall only to 10%, then

Accepted Answer

When the central bank reduces inflation to a lower target than what people expected, there could be an increase in unemployment as the adjustment to lower inflation may involve reducing demand and output in the short run. However, the extent of this increase in unemployment will be lower if people had expected inflation to be higher. Therefore, option B is the correct answer.

Question 16

Refer to Monetary Policy in Flosserland. Suppose the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and actually reduces inflation to that level. Suppose at first that the public thought inflation would only drop to 18%, but eventually become convinced that the inflation rate will stay at 12.5%.

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Question 17

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% and that it actually reduces inflation to that level. Suppose that the public was very skeptical and in fact thought the Flosserland Department of Finance was going to raise inflation to 30% so it could increase its expenditures. Then

Accepted Answer

If people were expecting 25% inflation, then they may have been prepared for the possibility of a rise in unemployment as the Department of Finance implements policies to reduce inflation. However, if people were skeptical and thought inflation would actually rise to 30%, they may have adjusted their expectations and behavior accordingly, potentially leading to a more significant rise in unemployment than if they had expected 25% inflation. Therefore, if unemployment does rise due to the Department of Finance's actions, it would likely have risen less if people had been expecting 25% inflation instead of 30% or higher.

Question 18

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If Mokanians lower their inflation expectations, which curve shifts to the left?

Accepted Answer

When Mokanians lower their inflation expectations, it means that they expect lower inflation in the future. This will reduce the current level of inflation as firms and workers adjust their behavior based on these expectations. As a result, the short-run Phillips curve shifts to the left. The long-run Phillips curve, which represents the relationship between inflation and unemployment in the long run, is not affected by changes in inflation expectations, and therefore, does not shift in this case.

Question 19

Which of the following played a role in depressing aggregate demand in 2001?

Accepted Answer

All three choices played a role in depressing aggregate demand in 2001. The end of the stock-market bubble led to a decrease in investment and consumer confidence. The corporate accounting scandals caused a reduction in corporate investment and led to a decrease in consumer confidence. The terrorist attacks on September 11 resulted in decreased consumer and business confidence, as well as a reduction in travel and tourism.

Question 20

Refer to Monetary Policy in Flosserland. Suppose that the Flosserland Department of Finance has run a public relations campaign claiming it will reduce inflation to 12.5% but it actually raises inflation to 30%. Suppose that the public had expected that the Department of Finance would reduce inflation but only to 22%. Then

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The answer of Refer to Monetary Policy in Flosserland. Suppose...

Quiz 22: The Short-Run Trade-Off Between Inflation and Unemployment

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%, then

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However its efforts made the unemployment rate rise by 10 percentage points for a year while output fell by 30 percent for a year. Which of the following is correct?

The long-run response to a decrease in the money supply growth rate is shown by shifting

The long-run response to an increase in the growth rate of the money supply is shown by shifting

Refer to Monetary Policy in Mokania. The Bank of Mokania reduced inflation to its announced goal of 5%. However, people were expecting inflation to fall to 7% and there was a favorable supply shock. In the short run which of the following made unemployment lower than otherwise?

If a central bank announced that it was going to decrease inflation by 5%, people revised their inflation expectations downward by 4%, and the central bank only lowered inflation by 1%, the short run Phillips curve would shift

Other things the same, if the central bank decreases the rate at which it increases the money supply, then in the long run

If a central bank reduces inflation 2 percentage points and this makes output fall 3 percentage points and unemployment rise 5 percentage points for one year, the sacrifice ratio is

Which of the following is not correct?

Other things the same, if the central bank decreases the rate at which it increases the money supply, then

Most economists believe that a tradeoff between inflation and unemployment exists

In response to the financial crisis of 2007-2008, policymakers used

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes its intent to reduce the inflation rate to 5%. If it is successful in doing so but people had expected inflation to fall only to 10%, then

Refer to Monetary Policy in Mokania. The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%. If Mokanians lower their inflation expectations, which curve shifts to the left?

Which of the following played a role in depressing aggregate demand in 2001?